23MeierPP14_18e - Chapter 14 Chapter Rent, Interest,...

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Unformatted text preview: Chapter 14 Chapter Rent, Interest, Profits RENT Terminology: • Rental price: price per acre price • Total rental income: P x Q • Economic rent: return above opportunity cost above RENT If the supply of land is If fixed, supply is vertical and perfectly inelastic. and Therefore, demand determines the rental price. price. Determination of Rental Price Changes in the demand for land... S Rental price (dollars) R2 R1 If demand increases... The rental price The increases. D2 D1 0 X Q Acres of Land Determination of Rental Price Changes in the demand for land... S Rental price (dollars) R1 R2 If demand decreases... The rental price The decreases. D1 D2 0 X Q Acres of Land RENT But demand also But determines total rental income as well as economic rent. economic Total Rental Income Total rental income is Total the rental price multiplied by the number of acres… by Much like total Much revenue: TR = P x Q revenue: Determination of Rental Income Changes in the demand for land... S Rental price (dollars) R2 R1 If demand increases... Total rental Total income increases. D2 D1 0 X Q Acres of Land Determination of Rental Income Changes in the demand for land... S Rental price (dollars) R1 R2 If demand decreases... Total rental Total income decreases. D1 D2 0 X Q Acres of Land Economic Rent Economic rent is a Economic surplus value… surplus A surplus above the surplus opportunity cost opportunity Economic Rent Opportunity cost is Opportunity reflected in the supply curve. When supply slopes upward, there is a positive opportunity cost. positive Economic Rent With perfectly inelastic With supply, however, there is no opportunity cost. Thus, all of rental income is also economic rent. is Determination of Economic Rent Changes in the demand for land... S Rental price (dollars) R2 R1 If demand increases... Economic rent Economic increases. D2 D1 0 X Q Acres of Land Determination of Economic Rent Changes in the demand for land... S Rental price (dollars) R1 R2 If demand decreases... Economic rent Economic decreases. D1 D2 0 X Q Acres of Land Alternative Uses An upward sloping An supply curve reflects a + opportunity cost… opportunity The difference between supply and the equilibrium price is the economic rent. price Determination of Economic Rent More elastic supply, less economic rent Rental price (dollars) S R E D T 0 OC X Q Acres of Land Determination of Economic Rent More elastic supply, less economic rent Rental price (dollars) S R E T 0 OC D X Q Acres of Land Determination of Economic Rent More inelastic supply, more economic rent Rental price (dollars) S R E D T 0 OC X Q Acres of Land INTEREST Terminology: • Interest: the price paid for the use of money the • Nominal interest rate: % • Real interest rate: nominal rate minus inflation rate rate Real Interest Rate Nominal interest rate is 15% and rate of inflation is 3%, real interest rate is 12%. Real Interest Rate 15% = 12% Real Interest Rate + 3% Inflation Premium Nominal Nominal Interest Rate Loanable Funds Theory of Interest S Interest Rate i, (percent) 8% D F0 Quantity of Loanable Funds Loanable Funds Theory of Interest S Interest Rate i, (percent) 9% 8% D↑r ↑ D2 D1 F 1 F2 Quantity of Loanable Funds Loanable Funds Theory of Interest S Interest Rate i, (percent) 9% 8% D↓ r ↓ D1 D2 F 2 F1 Quantity of Loanable Funds Loanable Funds Theory of Interest S1 Interest Rate i, (percent) S2 8% 7% S ↑ r↓ D1 F 1 F2 Quantity of Loanable Funds Loanable Funds Theory of Interest S2 Interest Rate i, (percent) S1 8% 7% S↓r↑ D1 F2 F1 Quantity of Loanable Funds Loanable Funds Market Loanable Df ↑ r ↑ Df ↓ r ↓ Sf ↑ r ↓ Sf ↓ r ↑ Interest rates and investment Interest Sf ↑ r ↓ C ↑ I ↑ Greater economic growth Sf ↓ r ↑ C ↓ I ↓ Lower economic growth Range of Interest Rates Range • Risk Risk • Maturity Maturity • Loan Size Loan • Taxability Taxability • Competition Competition PROFIT Economic (Pure) Profit (Pure) Profit Accounting Profit Profit Normal Profit Changes in Economic Profit Factors: • Market structure Market • Changes in demand Changes • Productivity Productivity • Government policy Government • Resource prices Resource • Technology Technology INCOME SHARES Wages Wages Rent Interest Proprietors’ income Corporate profits 71% 1% 1% 5% 5% 9% 9% 14% 14% ...
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This note was uploaded on 02/22/2011 for the course ECON 2023 taught by Professor Meier during the Spring '11 term at St. Petersburg College.

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